Why Won't My Mortgage Lender Release My Insurance Reimbursement?

Dealing with insurance checks that are made out to the bank as well as the homeowner.

Question

A recent storm did major damage to our home, particularly the roof. The insurance company has been fairly responsive, and recently sent us a large check. However, along with our name, the check also had on it the name of the bank that holds our mortgage. In other words, we can’t cash it without the bank’s agreement. And the bank says it won’t release the funds to us until we fill out a bunch of forms, make progress on getting the work on the roof and everything done, pass an inspection of the work, and even pay some extra fees for it to administer all this!

Can the bank do this? I’m worried that, what with all the delays, I’m going to be out of pocket a lot of money while I wait for the bank to get around to approving and paying the construction company’s bills.

Answer

You are describing a typical situation for homeowners with a mortgage on their house. After damage occurs, you are understandably eager to get the house fixed up—but your lender is equally eager to make sure its collateral is protected.

In the worst-case scenario, the lender fears that homeowners will cash the check, use it to pay other bills, and never get around to fixing the roof or doing whatever other work needs to be done. If you were to then fail to pay your mortgage, the bank might not get enough money to cover the amount of your loan when it forecloses on and sells your damaged home.

The key to surviving this process is to educate yourself about it (as you are doing now) and read all the relevant documents from your lender. Keep careful track of the stages of construction, so that you can let the bank know what progress has been made.

Then be ready to assert your rights if your lender’s representatives (possibly a separate company that it outsources to) are less than on the ball in okaying release of your funds. This might require both writing letters and making telephone calls (if you can make your way to a live human). Take detailed notes on every conversation you have with the lender, including the date and who said what.

Explain the situation to your contractor, as well. While contractors prefer to be paid as much of the fee upfront as possible, they have also seen the situation you are in before, and understand that they may have to do some work in advance of getting paid. It is not in the bank’s interest to hold up the work, though it might feel that way to you. The bank is likely to release partial payments along the way.

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